Gold Stocks, SP500 and the Dollar - What's Next?

Investors around the globe are concerned with the economic outlook, not only
with the United States but with virtually every country. This has caused not
only investors but banks and countries to start buying gold & silver in
order to be protected in case of a currency melt down in the coming years.

While the majority is concerned about the eroding economy, we have seen the
opposite in the financial market. Gold and equities have risen... That being
said the volume in the market remains light simply because the average investor
is no longer putting money into the market for long term growth. Instead individuals
are now focusing on saving and paying down debt.

That being said we all know light volume market conditions allow Wall Street
powerhouses to bid the market up. Not to mention with quantitative easing taking
place I'm sure that has also helped the market of late. While we don't know
for sure that QE is taking place as we speak, the sharp drop in the dollar
and strong move up in gold are pricing this into the market.

Let's take a look at some charts...

HUI - Gold Stock Index

This long term monthly chart of the HUI index provides valuable trading signals
for both gold stocks and gold bullion. As you can see below this index is trading
at a key resistance level after forming a bullish 3 year Cup & Handle pattern.
The next 1-2 months for the precious metals sector will be interesting as it
tries to break above key resistance. I would really like to see the HUI:GLD
ratio break to the upside to confirm if the breakout occurs.

SPY - Daily Long Term Trend

The broad market looks to be forming a short term topping wedge. If this is
to occur I expect it to take several weeks to play out. Looking at the chart
if we use Fibonacci retracements along with trend line support we can get a
feel for where this pullback should correct to.

That being said the broad market breadth and internals seem to be holding
up indicating higher prices over the long run. While the short term price action
is overbought and I expect a pullback to form, my analysis is pointing to higher
prices as we go into year end.

UUP - US Dollar Daily Price Action

Although the majority of investors have a bearish outlook on the economy,
we have seen a large price appreciation in equities and precious metals. This
is largely due to the fact that the US dollar is quickly getting devalued.
Simply put, as the dollar drops, it helps boost commodities and stock prices.

While a rising stock market is great to see, at some point the dollar will
become so cheap that it will start to have a very negative affect on the US
economy, commodities and stocks. Being from Canada it has always been more
expensive to take holidays in the United States, and I remember paying $1.50-$1.70
for every $1 green back. But now the dollar is almost at par making holidays
very affordable. The big question/concern is when will they ease off on the
printing? At the rate which they are printing the greenback will be at par
with peso... well not that extreme but you get the point Eh!

Weekend Market Conclusion:

As we all know the market has a way of making sure the majority of traders
miss major turning points. The saying is, "If the market doesn't shake you
out, it will wear you out" and it seems we are getting the later...

The never ending grind higher in precious metals has not had any big shakeouts,
rather its wearing out any short positions before rolling over to take a breather.
As for the stock market, we are getting much of the same thing as the market
grinds higher day after wearing out the shorts before rolling over.

That being said, there is more at work here than just regular market movements.
With the light volume in the market we know there is price manipulation and
QE (quantitative Easing) which is helping to boost prices and exaggerate market
movements.

Chris Vermeulen, founder of AlgoTrades Systems., is an internationally recognized
market technical analyst and trader. Involved in the markets since 1997.

Chris' mission is to help his clients boost their investment performance while
reducing market exposure and portfolio volatility.

Chris is also the founder of TheGoldAndOilGuy.com, a financial education and
investment newsletter service. Chris is responsible for market research and
trade alerts for of its newsletter publication.

Through years of research, trading and helping thousands of individual investors
around the world. He designed an automated algorithmic trading system for the
S&P 500 index which solves his client's biggest problem related to investing
in the stock market: the ability to profit in both a rising and falling market.

AlgoTrades' automated trading systems allows
individuals to investing using either exchange traded funds or the ES mini
futures contracts. It is supported by many leading brokerage firms including:

He is the author of the popular book "Technical
Trading Mastery - 7 Steps To Win With Logic." He has also been featured
on the cover of AmalgaTrader Magazine, Futures Magazine, Gold-Eagle, Safe
Haven,The Street, Kitco, Financial Sense, Dick Davis Investment Digest and
dozens of other financial websites. His list of personal and professional
relationships approaches 25,000, people with whom he connects and shares
is market insight with out of his passion for trading.

Chris is a graduate of Seneca College where he specialized in business operations
management.

Chris enjoys boating, kiteboarding, mountain biking, fishing and has his ultralight
pilots license. He resides in the Toronto area with his wife Kristen and two
children.